Inventory management: Definition, Importance, Benefit and Method

Checking good inventory is always a very necessary and essential issue in production management. Inventory is the bridge between production and consumption. Sellers also want to increase inventory levels to quickly respond to customer needs. The staff in charge of production and operations are also suitable for a large amount of inventory because it makes it easier to set up production plans. At the lowest level, money that lies in inventory will not be spent on other items. Because of that, inventory management can be treatable, not necessarily warehouse. In this article, we will clarify inventory management importance.

What is inventory?

Inventories are manufactured goods that are preserved by an enterprise for final sale. In other words, inventories are stock items a company makes for sale and the ingredients that make up the products. Therefore, inventory is the link between co-production and selling products that are part of short-term assets, using a large proportion, playing an important role in the business production of the business.

Inventories that exist in a manufacturing company can be analyzed into three categories:

  • Raw materials: that are sold or kept for future production, sent for processing, and purchased on the way home.
  • Semi-finished products: are products that are allowed to be used for production but are not yet finished and finished products are not kept in stock of finished products.
  • Finished product: is a finished product after the manufacturing process.

The above three types of inventories will differ from company to company depending on the characteristics of each business.

Some companies also maintain the other kind of inventory material, called the resource, corrosive items like office supplies, material cleaning machines, oil, fuel, light bulbs, etc. These types of goods are necessary for the production process.

What is inventory management?

Inventory management definition is a planning method for determining when to place an order and the number of orders so that the cost of ordering and the storage costs can be optimally effective without causing production loss.

What are the first steps of inventory management?

Plan and prepare

The first step in the inventory management process is planning and preparation. The management of inventory not only requires ensuring the complete and accurate quantity but also requires the administrator to ensure that the goods are imported and exported on time and according to the requirements of the goods. Therefore, planning for the import and export of goods is of great significance to businesses. Management needs to rely on the situation of the warehouse, the situation of production, and business to prepare the plan, personnel, and equipment accordingly.

Inventory of the warehouse

In this step, managers will check the inventory situation, the status of goods and raw materials to have a basis for planning accordingly. Inventory of goods also helps businesses understand the current status of products and materials to make decisions on consumption or timely supplementation.

Warehouse staff conduct a real inventory of inventory periodically and compare it with the accounting books to promptly adjust the matching data. Inventory data must be reported back to managers to manage inventory. Inventory should be done by two or more people and then collated to ensure accuracy. Today, the application of statistical management in the inventory control process will shorten inventory time and be more efficient.

Inventory of the warehouse

Manage export and import

Inventory management includes the following tasks: purchase management, raw materials, production management, returned goods, warehouse transfer, etc.

In the past, import and export management was often done through books and papers. However, today, businesses can apply management software in inventory control processes or use barcode scanners to speed up the export and import management process.

Inventory management

Enterprises can apply manual methods or management software to check between the actual quantity of goods and the quantity on the accounting books. Inventory will help administrators to know which products are about to end, which are about to expire, which products are selling well that need to be supplemented, etc.


After checking the books, determining the number of goods actually in stock, the total amount of imports and exports at the end of the period, the accountant shall carry forward the balance at the end of this period to the beginning of the next period. At the same time, the accountant is in charge of archiving documents, importing, exporting, preparing, and printing inventory reports, reports in the period to submit to managers.

>>>> Read more: 14 Inventory management Challenges, Problems and Solutions for it

Why is inventory management important?

Avoid loss of goods

Goods loss occurs due to many reasons, which can be employee fraud, loss in the warehouse, or loss due to slippage.

Employee fraud is quite common in many stores. The fact that the employee gets used to many times not only causes other employees to suffer injustice, the store culture goes down but also causes damage to the shop owner. Therefore, transparent and scientific inventory management will minimize the habits of warehouse staff and sales staff.

In addition, there are losses due to price slippage, for many retail stores of technology goods such as electronics, home appliances, etc. goods are quickly out of fashion, replaced, and price slippage. Although usually supported with the best price by the supplier, the profit of the store is still affected by slippage.

Therefore, one of inventory management benefits is that regular checking and comparison of the number of goods sold and the number of inventories will help the store to avoid significant losses, and to plan appropriate import of goods.

Cost savings

Goods/materials in stock for a long time that are damaged, worn out, expired, etc., must be destroyed because they cannot meet business needs. However, if the inventory is strictly, continuously, carefully planned, the store will avoid unnecessary waste.

The storage fee is usually not fixed, it depends on the quantity and size of the goods you store. The larger the inventory or the more products are too bulky, the store has to use many storage equipments and other costs such as electricity, water, labor, etc. Therefore, the cost of storage will increase.

Therefore, it is necessary to detect goods with large inventories early, goods that consume a lot of storage costs, to take measures to promptly release and circulate inventory, and save a lot of storage costs.

A large inventory is something no store owner wants. If capital is not profitable, it is “dead” capital. The large inventory causes a large amount of capital to be misused, wasted, or even thrown away.

For supermarkets/electronics stores/clothing stores, which import a lot of products that are difficult to sell, are not popular with customers, and are easily outdated, the possibility of selling losses or leaving is very large.

For a restaurant/cafe, managing a raw material warehouse is a crucial task. Good warehouse management makes it easy for restaurants to determine the cost of importing each day, determine the number of fresh ingredients used in the short term and the dry/frozen ingredients to store, the shelf life of the ingredients in the warehouse, which ingredients are about to expire, etc.

For restaurants, by estimating the number of dishes to be sold in a day/week/month, how many ingredients will be needed for each dish, how much of each ingredient is, the restaurant will have a clear plan for a purchase.

Increase sales for the store

The problem of raw materials and goods of the store is redundant, wasteful, but lacks revenue, affecting sales productivity, losing customers, and making the store unprofessional.

Effective inventory management will help you quickly know which items are selling well. It also helps you to import goods in time, or to offer promotions with low stock, large inventory in stock. Thus, the store will optimize revenue and profit.

Increase working capital efficiency

What is working capital?

Working capital is the cash flow to maintain the business and reinvest the stores in the short term. Working capital comes from the own capital and sales of the store, spent for the purpose of importing goods, importing raw materials for 1 month or 1 quarter. Lack of working capital, the store will be immobilized because there is no money to continue its business.

Stocks – Including the products and materials in the warehouse is a factor in working capital. If the goods in stock are well circulated, it will reduce working capital for 1 month, 1 quarter and shorten the capital turnaround time.

This means a lot for many stores with a low budget.

  • Reporting inventory of goods by week, day, and hour will help managers easily orient the timely import of goods, thereby adjusting working capital flows.
  • The ability to quantify raw materials and quote the cost of each dish/drink for the restaurant/coffee shop model helps the store proactively raise the right amount of capital. The store only needs to multiply the cost of 1 dish/drink by the quantity that will be sold during the day/week/month.
  • Warehouse management operations will indicate the type of goods that are in large stock so that the store owner can devise strategies to stimulate demand by reducing prices and promotions.

Instead of having to budget for 1 month or 1 quarter, store owners can better anticipate by fully exploiting the cash inflow.

>>>> Read more: Expert’s guide on 21 must-know inventory management techniques

How to improve inventory management?

How to improve inventory management?

Make sure everything is in its correct place

This is the key to helping shop owners effectively manage their inventory. Disorganization in the way the goods are sorted can interfere with the refilling process and make it more difficult for your employees to control and pick up the goods.

If everything is in place, you will easily find out which goods have disappeared, helping to reduce damage and theft.

In addition, placing the goods in the right position helps you easily control which goods are out of stock, need to import more, or which are too much in stock and need to be liquidated.

Always do a good job of preventing damage

This means you need to be in control at all times to prevent any possible loss, affecting your business as well as causing damage or loss to your store.

The import and export of goods must be monitored in detail by a professional department. This is seen as the only way to prevent loss and support effective inventory management.

Invest in inventory management methods training

Investing in effective inventory management training should start as soon as possible, the training should be detailed to help your employees get the most accurate capture.

It should be noted that training procedures need to be closely linked with implementation for the best effect.

Tight connection between departments

The unified workflow between departments always makes your business much easier and more efficient.

Goods supply and demand need to be planned and studied before being imported in large quantities.

Customer behavior will always determine the destiny of a product, so tracking trends is a must in order to grow a business.

Optimize your import process

For small retail stores, optimizing your inventory is the key to efficient inventory management.

Therefore, if you can eliminate errors in this step, it will help you greatly reduce problems arising in the next process.

In addition, monthly and quarterly inventory statistics will help a lot for running your business, especially if you don’t have too many Stock Keeping Unit (SKU) codes. 

Optimize your import process

How inventory management works

Independent demand and contingent demand are two ways to assess demand for end goods. Firstly, where the necessary amount does not rely on another supply, this is independent demand. Sometimes these are finished products sold to clients. Individual demand is derived from purchased orders, projections, knowledgeable predictions and prior sales data history in inventory management.

In contrast, contingent demand depends on an additional supply, categorized as the amount needed. The supplies cause the output of finished goods or finished goods to fall under dependent demand.

For instance, a bike manufacturer will have its inventory in both categories. In this case, the finished product or bike will be regarded as the independent demand. The raw materials like rollers, pedals and brakes, however, would be classified as dependent demand. These components are the components that make up the mounting and based demand of a bicycle.

The inventory management helps revenue estimates. You will supply details for purchasing supplies and recognise sales trends that guide what inventory in future shipments should be ordered. If 90 bicycles will be demanded independently within the next month, then anything needed for bicycles in the dependent demand group needs to be ordered as well. The production of all 90 bicycles needs to be ordered in time. This is, however, a simplistic balance. It is very seldom that only one item is made by a company. In the category of dependent demand several more components would be made if the company had produced bikes, pumps, helmets, clothes, and shoes. In order to fulfill each sales item, these components also need to be ordered.

>>>> Read more: Inventory management process: Benefits and How to improve it?

The items must be stored and arranged effectively in a warehouse once they have been purchased and shipped. The inventory control ensures that each item is tracked until it reaches the warehouse. It confirms revised inventory amounts and sends alerts when stock falls. If a finished product is finished, inventory management shall store and monitor the product before it is sold. When sold in the inventory management system, the status of the item is updated. The device will save the data for future sales projections when the final product is sold. If there was maybe a strong demand in the summer for bicycles and helmets for the previous two years, then this pattern will be recognized by a sales forecast and identified by a company for potential inventory purchases.

Final words

The inventory management is a dynamic part of a business. It can be simplified by many systems and procedures and best handled by dedicated inventory management software. Different management systems perform best for different businesses, depending on the size of a company and the extent of its inventory. In any case, it is critical that your biggest asset inventory is managed by the most efficient method.

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